In a significant policy shift, the Indian government has set a debt-to-GDP target of 55.6% for the fiscal year 2026-27, with nominal GDP growth projected at 10%. This move marks a departure from over two decades of focusing primarily on reducing the fiscal deficit, as announced by Finance Minister Nirmala Sitharaman during her Union Budget presentation in Parliament.
New Fiscal Framework Unveiled
Presenting the Union Budget for 2026-27, Sitharaman stated that the government aims to lower the debt-to-GDP ratio from 56.1% in the current year to 55.6% next year. The nominal GDP is assumed to grow by 10%, reaching approximately Rs 393 lakh crore. This target, however, is slightly higher than economists' expectations, which hovered around 55%.
"A declining debt-to-GDP ratio will gradually free up resources for priority sector expenditure by reducing the outgo on interest payments," Sitharaman emphasized. The medium-term goal is to achieve a ratio of 50% by 2030-31, within a band of 49-51%, as mooted last year.
Impact on Government Borrowing and Ratings
The shift comes at a time when India's high public debt levels have been a concern for global rating agencies like S&P, Moody's, and Fitch. These agencies often cite general government debt, including state liabilities, as a percentage of GDP, as an obstacle to higher credit ratings. Improved ratings could help lower borrowing costs, which are set to rise sharply.
Gross government borrowing is projected to increase to Rs 17.2 lakh crore in 2026-27 from Rs 14.61 lakh crore in 2025-26, primarily to finance an estimated fiscal deficit of Rs 16.96 lakh crore, or 4.3% of GDP. Sitharaman confirmed that the Centre achieved its fiscal deficit target of 4.4% of GDP for 2025-26 as promised.
Rising Debt Repayments and Interest Burden
A significant factor driving borrowing is the need to repay past debt. According to Reserve Bank of India data, the Centre must repay Rs 5.47 lakh crore in 2026-27 from previous borrowings. Net borrowing, after accounting for these repayments, is estimated at Rs 11.73 lakh crore, slightly up from Rs 11.33 lakh crore this year.
Looking ahead, debt repayments are expected to surge, reaching Rs 9.06 lakh crore by 2030-31. This escalating burden is reflected in interest payments, which will rise from Rs 12.74 lakh crore this year to Rs 14.04 lakh crore in 2026-27. To put this in perspective, interest payments alone will account for 26% of the government's total projected expenditure of Rs 53.47 lakh crore for the upcoming fiscal year.
In contrast, the Centre's capital expenditure target for next year is set at Rs 12.22 lakh crore, which is lower than its interest payments. Experts warn that high interest costs on accumulated debt limit the government's ability to invest in productive sectors like infrastructure and healthcare.
Flexibility Amid Global Uncertainty
The Economic Survey for 2025-26, presented earlier, highlighted that the debt-to-GDP target offers a "concrete commitment with a specific date" while allowing flexibility to adjust fiscal policy in response to emerging needs. This is particularly crucial in a volatile geopolitical and geoeconomic environment.
Budget documents cited this uncertainty as the reason for not providing rolling targets for the debt-to-GDP ratio for the next two years. "While India's growth outlook remains positive... it is not insulated from risks emanating from outside the country," the documents stated, underscoring the challenges in fiscal policy management.
The pivot to debt-to-GDP as a primary fiscal metric represents a strategic recalibration, aiming to balance fiscal discipline with the need to stimulate growth and manage external risks effectively.
